london – Real It is down more than 9% against the US dollar so far this year and despite recent relief, currency strategists see further pain for the pound.
bank of england delivered last week Another 25 basis points hike in interest ratesmore cautious steps than peers such as US Federal Reserve And Swiss National BankBecause it tries to rein in rising inflation without prolonging the slowdown in economic growth.
As well as global problems caused by the war in Ukraine and supply chain issues, the UK is also navigating the effects of Brexit, domestic political uncertainty and a . major cost of living crisis,
Though cautioning for now, the bank said it is willing to act more “coercively” if inflation, which is Currently running at 9% And those that the Monetary Policy Committee projects will exceed 11% in October prove to be more sustainable. Analysts believe this means that if the inflation outlook turns weak, a hike of 50 basis points could be made in the next few sittings.
Goldman Sachs Analysts argued in a note on Sunday that the BoE’s more careful approach to containing inflation in order to cushion the growth impact is “negative for the currency, in line with sterling’s 5% depreciation since mid-March.”
“But our client interactions and positioning metrics suggest this is a popular view – sentiment on Sterling is quite negative, and it trades as if it is in a good position,” Goldman strategists Zach Pandal and Kamakshi Trivedi said. Is.”
“We and the market interpreted this week’s policy statement as a slight softening of the ‘temporary’ inflation outlook. Still, some on the MPC have a higher bar for ‘more persistent’ inflationary pressures and the actions of the BOE . Continue to stand out relative to your DM teammates.”
Thus, Goldman continues to see further underperformance for the pound, especially as the European Central Bank looks to facilitate credit backstops and tighten a bullish monetary policy of its own. However, Pandal and Trivedi noted that “the risk-reward of sterling shorts has eroded somewhat.”
During this BNP Paribas Strategists, in a flash note last week, reiterated their bearish call on the pound due to a “deteriorating economic outlook, elevated political risks and (their) outlook that the Bank of England will provide less strength than market value.”
BNP Paribas is placing a long position on the Euro versus the Pound, with a target of £0.89. The euro was trading below 0.86 pounds on Monday.
UK economy shrank 0.3% in April Back-to-back declines for the first time since the start of 2020, following a 0.1% decrease in March, and the Bank of England noting an increased risk of recession in late 2022 and early 2023.
small room for maneuver
According to Mark Cogliatti, head of global capital markets at Validus Risk Management, the bank’s monetary policy and the inflation path compared to its counterparts is likely to be the biggest determinant of sterling’s fate.
Cogliatti said in a note after the bank’s latest announcement on Thursday that the current inflation trajectory “leaves little scope for the MPC to take its foot off the gas on tightening monetary policy”.
“The fact that real rates (adjusted for inflation) remain lower in the UK than in the US or EU does not bode well for sterling,” Cogliatti said, adding that broader risk sentiment will also be an influencing factor.
“History tells us that when markets are in ‘risk-off’ mode, sterling has a tendency to under-perform, so with the S&P 500 now officially in bear market territory (ie 20 from its recent peak). % down) there is a risk that sterling remains under pressure in the near term, particularly against the safe haven dollar.”
At its two-year low last week, the pound fell below $1.20, before recovering above $1.24 following a Bank of England decision and settling at around $1.2260 on Monday.
A complete reversal of the recent bearish trend would require a rally above $1.25, according to John Hardy, Head of FX Strategy at Saxo Bank, who also noted that sterling bears will only feel comfortable if the pound breaks through $1.22. will sink back.
“Elsewhere, sterling expectations should take a look at EURGBP, where the latest move above 0.8600 has been a bullish reversal, with a more well-defined reversal,” Hardy said.
“Looking at the 0.8500 area to see if we are moving from lower and back into the range below 0.8300.”